- Describe a constrained resource in retail business
A constrained resource is something that you have a limited amount of. In a manufacturing business it may be machine time, labor hours or raw materials. Whenever there is a constrained resource, as a manager, you need to determine the best way to use the limited (constrained) resource to bring the most money to your net profit (bottom line).
So you are the manager of a small retail clothing store. You have 1000 square feet of space to use for inventory (excluding walkways, register area and fitting rooms), and you need to use it in the most effective manner to create the best net income for your store.
You have the following inventory:
- Jeans: Each pair contributes $40 to net income and you can get two in one square foot of space.
- Shirts: Each shirt contributes $10 to the net income, but you can get five in one square foot of space.
If your entire store was jeans you would have 2,000 pair of jeans contributing $40 per pair or $80,000 to your net income.
If your entire store was shirts, you would have 5,000 shirts each contributing $10 or $50,000 to your net income.
How would you stock your store? Well, if you were simply looking at using your space to maximize net income, and you thought jeans would work by themselves, you would stock it with jeans right?
What else may you want to look at in your retail space? Perhaps for every pair of jeans you sell, you also sell two shirts. Is one more difficult to prepare for sale? Maybe shirts need to be pressed and hung, while jeans are simply folded on a shelf.
There are many things to think about when you stock a small retail store, with space constraints you will need to experiment with the best product mix!
So what if our constrained resource is manufacturing space or time? How do we figure out the best usage of a constrained resource? We obviously want to use that resource to generate the most profit for the company.
Let’s go back and look at two pairs of shoes made by Hupana. The Runner and the Slogger.
|The Runner||The Slogger|
|Selling price per unit||125||100|
|Variable cost per unit||55||55|
|Contribution margin per unit||70||45|
|Contribution margin ratio||56%||45%|
If we just look at the contribution margin, it looks like the Runner is contributing more to the net income, right?
But let’s look a little further at this. The Runner, take 40 minutes of machine time to produce, and the Slogger only take 30. The machine can run for 1,200 minutes per day.
So with that information, the machine can make 30 pair of the Runner per day, but can make 40 pair of the Slogger.
Market analysis says we could sell 20 pair of the Runner each day, and 30 pair of the Slogger, which would be a total number of machine minutes of
- The Runner= 40 minutes x 20 pair = 800 minutes
- The Slogger= 30 minutes x 30 pair = 900 minutes
So we have demand that would use 1,700 minutes of machine time, but our machine can only run 1,200 minutes a day. What do we do? This machine is our bottleneck in the process, so we need to dig deeper yet to decide how to best use our machine time. We need to figure out the contribution margin per minute of machine time for each pair of shoes!
|The Runner||The Slogger|
|Contribution margin per unit||$70.00||$45.00|
|Machine time to complete||$40.00||$30.00|
|Contribution margin per minute||$1.75||$1.50|
(CM per unit/machine time to complete)
So which pair should we make first to maximize our profit? The Runner—we can use the first 800 minutes to make 20 pair of Runners. This will leave us with 400 minutes to make Sloggers, so we can make 13 pair before we run out of machine time.
We won’t meet the total demand for our shoes, but we will maximize our profits using our machine in the most cost effective way, within the constraints.
What might be another option? Since our demand is high, we could buy another machine or we could raise our prices! That is a whole different calculation for another day.
So, now, what if some parts of your process can produce higher output than another? This is called a bottleneck, and is another constrained resource.
A bottleneck happens when one machine can’t keep up with the one before it. Or it might be a process in a service business that holds up the rest of the process. A bottleneck is essentially the step that limits total output because it has the smallest capacity. Essentially, a bottleneck could be called a constrained resource, right?
Let’s look at a dental office. The front desk staff might be able to make 100 appointments per day, but if you only have dentists to see 20 patients per day, and dental hygienists to see another 30 per day, you have a bottleneck. The office will not be able to get past the 50 patient per day total, no matter how hard they try.. We identified the weakest link in the chain at the dental office, as patients the dentist can see in a day.
We can’t put more strain on the system than this weakest link can handle, so we need to make sure the office staff is not making more appointments!
Let’s look at a machine example. If you have five machines, and each one does a task, you might have a chain that looks like this:
Where is your constraint? Well, in this example it is right at the beginning of the process right? The cutting and stitching machines can only accommodate 10 pair of shoes per hour, even though the lacing, trimming, inspecting and boxing could handle more. How could you fix this problem? You could add an additional machine at each the cutting and stitching phase of the process. You could look for newer, faster equipment. Or, you could just move at the pace of the constrained resource.
The bottleneck might occur at other areas of the process. Then you, as a manager, would need to decide which approach to take. Another option would be to outsource the task of the constrained resource. In the case of our shoes, you might outsource the cutting and stitching to another company, and then finish the rest on your equipment. There are options to fix a bottleneck, and the solution will depend on your individual business needs.